The Realty Income Third Quarter 2023 Earnings Conference Call began with a welcome from the operator and a reminder of the call's recording. Tyler Grant, Investor Relations, introduced Sumit Roy, President and CEO, and Jonathan Pong, Senior Vice President, Head of Corporate Finance. They discussed the company's results, cautioning that actual future results may differ from the forward-looking statements made during the call. The company is pleased with their execution and maintains a positive outlook. They also announced the signing of a merger agreement with Spirit Realty.

In the third quarter, the company invested $2 billion in acquisitions, raised $2 billion in capital, and re-leased 284 properties. They also increased their 2023 AFFO per share guidance and announced a merger with Spirit Realty. The merger is expected to be immediately accretive to AFFO per share and provides potential for future earnings growth. Despite uncertainty in the capital markets, the company's conservative underwriting of their portfolio could lead to even greater accretion than expected.

The acquisition of Spirit's portfolio is expected to bring benefits to the company, including increased size diversification, better access to capital markets, and the ability to handle larger deals. The company has invested $2 billion in real estate in the third quarter, with a significant portion coming from international markets. They have completed 132 transactions, including 34 sale-leaseback deals and six larger transactions. This showcases their ability to find and close deals that are not commonly pursued by other net lease companies. The company's year-to-date investment activity is $6.8 billion, with spreads of over 100 basis points.

The company's capital markets experienced a significant increase in cost of capital, resulting in a decline of 30 basis points from last quarter. The company remains disciplined and patient in allocating capital and is focused on delivering attractive risk-adjusted returns to shareholders. They have increased their investment guidance for 2023 and maintain a high level of selectivity in pursuing new opportunities. From an operating perspective, the company's portfolio is healthy and performing well, with a slightly lower occupancy level and better than average rent recapture rates.

The company has successfully managed over 5,300 lease expirations since 1996, with improving recapture rates in recent years due to their asset management expertise and proprietary data analytics platform. Their credit watchlist has decreased by 120 basis points, mainly due to the removal of Cineworld. The company has been able to recover 60% of prior base rent on 41 locations without any capital contributions and has negotiated percentage rent agreements to potentially recapture up to 70% of prior rent. Same-store rent grew at a higher rate of 2.2%, allowing the company to raise their full year guidance to approximately 1.5%. From a balance sheet management perspective, the company remains committed to maintaining their A3/A minus- credit ratings and has seen a decrease in their net debt and fixed charge coverage ratios.

In the third quarter, we raised $886 million in equity and ended with $749 million in unsettled forward equity. We also have $4.5 billion in liquidity, including $1 billion in rate protection against rising 10-year yields. The recent acquisition of Spirit will provide earnings accretion and the company has a well-laddered debt maturity schedule to limit refinancing risk. The company aims to maintain a balanced fixed rate debt stack with manageable refinancing risk, with no year having more than 12% of total fixed rate debt maturing.

The paragraph discusses the complementary real estate portfolio and debt stack of Spirits, which is a good fit with the existing maturity schedule. The company plans to engage in opportunistic liability management exercises when economically advantageous. The team members who have worked hard to support the transaction are thanked. The company has a well-established growth-focused business model and a long history of prudently allocating capital. The acquisition of Spirit is expected to provide a solid building block for growth in the future. The company anticipates high single or low double-digit operational returns and offers stability. The floor is now open for questions from the operator.

Joshua Dennerlein asks about the re-leasing spreads and what drove them to be better than the historical run rate. Sumit Roy explains that it was largely driven by non-retail re-leasings and a large industrial distribution center, as well as the ability to control many assets for clients and have beneficial discussions. He also credits the asset management team and predictive analytics for helping negotiate successful renewals.

Sumit Roy, CEO of Realty Income Corporation, discussed the company's strategy for acquiring assets with better internal growth potential. He mentioned that they are willing to take control of assets with lower current rents if they believe they can improve the economics in the long run. This may result in a temporary decrease in occupancy levels, but the company is focused on creating better rent recapture. Roy also mentioned that the company has a healthy pipeline of approximately $9 billion in potential acquisitions, but did not provide details on the yields or potential acquisition of Spirit.

In the third quarter, the company completed large transactions with UK grocery operators ASDA and Morrisons, totaling close to $900 million. These were sale-leaseback deals negotiated by the company. Similar transactions are expected in the fourth quarter, with cap rates adjusting slowly compared to the company's cost of capital. The company will be selective in future deals and expects to see a movement in cap rates in the right direction.

Sumit Roy discusses the company's higher cap rates and how they reflect the rapid movement in their cost of capital. He mentions that they have raised a fair amount of capital through the ATM and other means. Nate Crossett asks about the company's appetite for investments where they don't own the asset 100%, and Sumit Roy clarifies that they generally do not have permanent JV structures, but may enter into them for certain asset types such as casinos and data centers which require a large amount of capital.

In response to a question about the high percentage of European assets in the recent transaction and the low cap rates, Sumit Roy explains that Realty Income does not target investment-grade assets but focuses on finding assets that offer a good risk-adjusted return. He also mentions that the negotiated transactions with top operators in the UK were priced well and have strong growth potential, making them a good investment for the company. Overall, they consider all factors when evaluating the risk and potential of an investment.

The speaker discusses the focus of their investments, which is on the real estate and performance rather than targeting investment grade properties. They also mention that their portfolio generates a yield of over 8%. The questioner asks about reserve reversals and the speaker clarifies that there will not be any significant ones in the fourth quarter or in 2024.

The speaker discusses the company's historical credit loss and their plans for the future, including a projected 4-5% growth in AFFO per share without relying on equity capital markets. They also mention the current cost of capital and their strategy of being "hyper selective" in their investments due to the rapid changes in the market.

The speaker discusses the challenges of entering into transactions in a changing cap rate environment and the need to be selective in order to drive cap rates and achieve desired spreads. They also explain their strategy for maximizing revenue, which may involve holding onto vacant assets for longer in order to secure the best rent proposals.

Sumit Roy explains that the company has maintained a 98% occupancy rate, as it is the natural state for their business model. They will continue to sell assets vacant if it makes economic sense. He also mentions that the recent record deal volume in Europe is not a one-off, as the region is back to competing for capital on par with the US. However, cap rates take longer to adjust in international markets. The company expects to see more product coming in from international markets, as reflected in their pipeline.

The company expects international investments to make up around 30-40% of their investments, with the remaining 60-70% being in the US. They plan to prioritize maintaining a 5.5 times leverage and will not sacrifice their balance sheet for slightly higher growth. The recent Cineworld agreement may have helped their guidance, and they will provide more details on the impact of the agreement in the future.

Sumit Roy and Eric Wolfe discuss the impact of the Cineworld transaction on Cineworld's financials. Roy states that the impact has already been factored in and reflected in their updated guidance for 2023 and comments about 2024. Wolfe asks about the increase in financing receivables in the second quarter, and Jonathan Pong explains that it is due to the accounting guidance for sale-leaseback transactions. These types of deals will have a larger impact on financing receivables compared to other types of deals.

During a conference call, Wes Golladay from Baird asked about the current sentiment among clients and whether they are pausing to see where rates settle. Sumit Roy responded that there is ongoing debate, as clients tend to think about the world as it was 12 months ago rather than understanding the drastic changes that have occurred. However, when clients face pressure such as maturing debt or a need for growth, they are more willing to accommodate the new cost of capital environment. Ron Kamdem from Morgan Stanley also asked about tenant health, specifically whether the recent Cineworld transaction will affect the rent coverage ratio of 2.8. Sumit Roy did not directly answer this question, but did mention that there is variation among clients in terms of their sophistication and urgency, which can affect negotiations.

Sumit Roy and Ron Kamdem discuss Cineworld's impact on four-wall coverage and the consistency of 2.8 to 2.9 number over the last three quarters. Roy explains that the cost of capital has started moving and reserves had to be unwound because clients were doing better than expected. He also mentions some bankruptcies in the casual dining side, but they have a small impact on the overall portfolio. Kamdem asks about AFFO growth per share and Roy clarifies that it includes the $1.8 billion of debt coming due next year, even with the interest cost headwind.

The company is anticipating challenges in refinancing their $1.8 billion debt and is taking this into account in their forecasts. They are hopeful that the Spirit transaction will close in January or February and that their portfolio will continue to perform well. They believe they can achieve their target without raising equity. They plan to assume Spirit's term loan and have had positive discussions with lenders. The acquisition may have an impact on the company's credit ratings, but initial reception from fixed income investors has been good.

The paragraph discusses the positive reaction and feedback from rating agencies regarding Realty Income's recent acquisition of EG Group. The company's credit metrics and bond covenants remain unchanged and the discounts on larger transactions are expected to persist in the future due to the company's ability to access differentiated capital and its strong trading volume. This allows Realty Income to negotiate better cap rates and more favorable leases.

The speaker discusses recent transactions and highlights the success of the company in completing large deals. They mention specific examples and express confidence in their ability to continue this trend. They thank the audience for attending and invite them to an upcoming conference.

This summary was generated with AI and may contain some inaccuracies.